Allison Dukes
Senior Managing Director & Chief Financial Officer at Invesco
Thanks, Marty, and good morning everyone. I'll start with Slide 4. Our investment performance continued to be solid in the second quarter, with 55% and 60% of actively managed funds in the top half of peers, or beating benchmark on a three and a five year basis. These results reflect continued strength in fixed income and balanced product, areas where we continue to see demand from clients globally.
Moving to Slide 5, we ended the second quarter with $1.39 trillion in AUM, a decrease of $166 billion from March 31, as significant market declines and FX rate changes contributed to $160 billion of the decline. As Marty mentioned earlier, we experienced our first net long-term outflow quarter in two years, with $6.8 billion in net outflows. Despite that, our business has proven resilient, and our relative net flow performance in the period was among the strongest in our peer group. Our passive business continued to grow with $4.5 billion in net long-term inflows. Growth in passives was offset by $11.3 billion of net long-term outflows and active capabilities.
The institutional channel continues to demonstrate the breadth and resilience of our platform, with $1.5 billion of net long-term inflows in the second quarter. The channel has been a consistent source of growth and has now been in net inflows for 11 straight quarters. We continue to see mandate fund across a diverse range of capabilities, and as I'll discuss later, our pipeline remains solid. Global market volatility weighed on the retail channel this quarter, which experienced $8.3 billion of net outflows, primarily in the Americas and EMEA.
ETF and index strategies remain a key growth area for Invesco, and were a source of relative strength in the second quarter, with $4.8 billion of net long-term inflows. Excluding the QQQs, Invesco captured 6.1% of industry's net inflows, significantly higher than our 3.2% share of total industry assets under management.
Moving to Slide 6, we experienced a slowdown in net flows across all regions this quarter amidst exceptional market volatility. Net flows were positive in Asia-Pacific, inclusive of $2.2 billion of net long-term inflows into our China joint venture. As we've showcased previously, we are uniquely positioned in China, and expect growth to accelerate there as the economy recovers and COVID restrictions ease. Consistent with industry trends, net flows slowed in the Americas and EMEA with both regions in net long term outflows for the quarter.
From an asset class perspective, we saw strength in fixed income in the second quarter, with net long-term inflows of $4.8 billion. Drivers of fixed income flows included our China JV, stable value, and several fixed income ETFs. We experienced net outflows in alternative this quarter, as net inflows and direct real-estate mandates, and two new CLOs were offset by net outflows and bank loans and our global targeted returns capability. Year-to-date, net inflows into alternatives were 4 -- excuse me, were $5.9 billion, equivalent to a 6% organic growth rate. Excluding $2.5 billion in net outflows and global targeted return, organic growth in alternatives is 8% year-to-date.
As global markets declined significantly in the quarter, we experienced $7.7 billion of net outflows in equity capabilities. We continue to see higher redemptions pressure in some of our larger equity funds, particularly in global and developing market equities, which accounted for $6.6 billion of the net outflows.
Moving to Slide 7. Our institutional pipeline was $24 billion at quarter end, a decrease of about $5 billion from the prior quarter due to fundings during the second quarter, as well as normal fluctuations and the timing of client investments. Our pipeline has been running in the $25 billion to $35 billion range, dating back to late 2019, so this was close to the lower end of that range. While the pipeline is strong, we are seeing some delays in mandates funding due to market uncertainty, and expect that the typical funding cycle may lengthen by one to two quarters.
The pipeline also remains relatively consistent to prior quarter levels in terms of fee composition, with an average fee rate running between the mid-20 and mid-30 basis point range. Overall, the pipeline continues to be diversified across asset classes and geographies. Our solutions capability enabled 33% of the global institutional pipeline, and created wins and customized mandate. This has contributed to meaningful growth across our institutional network.
Turning to Slide 8, the significant declines in global markets over the past several months have impacted our revenue base. Second quarter 2022 net revenue of $1.17 billion was 6% lower than last quarter, and 10% lower than the second quarter of 2021. Despite the volatile market backdrop, net revenue remained 13% higher than the second quarter of 2020, the last time we experienced this type of broad market decline.
Money market fee waivers abated during the quarter after the Federal Reserve raised rates twice to combat inflation. In the net money market, fee waiver impact had declined to $12 million in the first quarter of this year, and it was less than $4 million in the second quarter. Moving forward, we do not expect money market yield waivers to materially affect our revenue base.
Total adjusted operating expenses of $762 million were up $4 million, or less than 1% as compared to the first quarter of 2022, and flat to the second quarter of 2021. Declines in employee compensation due to seasonally lower payroll taxes and variable incentive pay were offset by increases in other expense categories. G&A expenses were $17 million higher than the first quarter as we incurred $14 million of fund related expenses during the period that we do not expect to recur in the future.
The increase in property office and technology expenses can be attributed to additional rent associated with the move of our Atlanta headquarters to a new development in Midtown Atlanta in early 2023. We took possession of our new building in April as we build out the space, while continuing to operate from our current Atlanta office. As a result, property and office expense will remain $2 million to $3 million above the eventual run rate for the next four to five quarters.
As COVID restrictions eased across North America and Europe, we saw a meaningful return of client activity in business travel, which contributed to increases in marketing, and G&A expenses that I'll cover on the next slide. Interacting in-person again with our clients and our colleagues around the globe is integral to our success, as we transition to our new normal ways of working. We remain highly focused on disciplined expense management, while continuing to deliver for our clients.
Moving to Slide 9. As of the end of the second quarter, we have met our initial $200 million savings goal from our strategic evaluation program. As compared to a normal pre-COVID run rate of expenses, we have delivered $213 million of annualized savings across employee compensation, our facilities portfolio, and third party spend, which includes a new -- a lower new normal level of travel and entertainment expense.
Since the beginning of the COVID-19 pandemic, our travel and entertainment expense ran at significantly depressed levels as COVID mitigation measures were put into place and business travel slowed to near zero. Over the past quarter, we saw a meaningful resumption of business activity as restrictions eased across North America and Europe.
We spent approximately $14 million on travel and entertainment this quarter. If we look back to the second half of 2019, travel and entertainment expenses averaged around $25 million per quarter in that pre-COVID environment. Given our new normal ways of working and various measures we put in place, we do not expect to see travel revert to pre-pandemic norms. We believe that our experience in the second quarter is approaching a new normal range for quarterly spending, and we expect to recognize at least $5 million in savings per quarter, or $20 million annualized, as compared to prior levels of activity.
Moving forward, we will continue to focus on maintaining expense discipline and scaling our global business. We employ a continuous improvement mindset, and we'll take full advantage of efficiencies where there are opportunities. In the second quarter, we incurred $5 million of restructuring cost related to this initiative. In total, we recognized approximately $247 million of our total estimated $250 million to $275 million in restructuring cost associated with the program. As a reminder, the costs associated with the strategic evaluation are not reflected in our non-GAAP results.
Going to Slide 10, adjusted operating income decreased $129 million from the second quarter of last year to $412 million, primarily due to lower revenue as a result of the market declines. Adjusted operating margin was 35.1% as compared to 41.5% in the second quarter of last year. EPS was $0.39 as compared to 0.78 last year due to lower operating and non-operating income. In the second quarter, equity and earnings of unconsolidated affiliates was a negative $8 million as a result of unfavorable changes in CLO valuations, compared to a positive $40 million a year ago $0.78 last year, due to lower operating and non-operating income. In the second quarter, equity in earnings of unconsolidated affiliates was a negative $8 million as a result of unfavorable changes and CLO valuations, compared to a positive $40 million a year ago when valuations were increasing. Other gains and losses were negative $29 million this quarter as compared to a positive $25 million a year ago, driven by lower valuations of our seed capital associated with market declines.
The effective tax rate was 24.8% in the second quarter. We estimate our non-GAAP effective tax rate to be between 24% and 25% for the third quarter of 2022. The actual effective rate may vary from this estimate due to the impact of non-recurring items on pretax income and discrete tax items.
On Slide 11, you can see how our asset base has evolved over the past two years. As client demand has skewed towards lower yielding passive products, we have tailored our product offering to meet that demand and experience significant growth in passive and money market offerings. Realizing that our business mix is shifting, we continue to be focused on aligning our expense base with these changes. While the declines in global markets pressured our margins this quarter, operating margin of 35.1% is within a normal range for where we are in the business cycle, and remains above our second quarter of 2020 levels the last time we experienced a market drawdown of this magnitude. As I mentioned earlier, we will continue to be vigilant in prudently managing expenses, and would expect margins to stabilize and eventually expand as markets recover.
I'll conclude with a few points on Slide 12. Our balance sheet cash position was $937 million on June 30, a decrease of $396 million as compared to last year. The lower cash balance was due to the $600 million early debt redemption in May at economically attractive terms. To help facilitate the early payoff, we carried a balance of $185 million on our revolving credit facility at the end of this quarter. We expect to repay that balance in the near term and begin to build cash again over the future quarters. In terms of the benefit, the early redemption resulted in a net $6 million of savings, with a make hold fee and other transaction related expenses being $5 million in the quarter, and interest expense savings of nearly $11 million this year.
Second quarter interest expense included the make hold fee and other related expenses that totaled $5 million, offset by nearly $3 million in interest expense savings. For the third quarter, we expect interest savings of nearly $5 million, and for the 4th quarter over $3 million. This will result in interest expense being lower by these amounts in the third quarter and the fourth quarter.
Our leverage ratio, as defined under our credit facility agreement was 0.7 times at the end of the second quarter. If preferred stock is included, it was 2.6 times. Both metrics are an improvement over 0.9 and 2.9 times from one year earlier, as our total debt outstanding reached its lowest level since 2015 at $1.7 billion. Overall, the progress we have made in managing our cost base and building balance sheet strength has given us a strong base from which to operate an ample flexibility to navigate the current drawdown in global markets.
We're confident that by continuing to execute the strategy we have laid out across our key capability areas, Invesco will continue to grow organically over the long run, and be the go-to partner for our clients, while delivering value to our shareholders. With that, I'm going to turn it over to the operator, and we'll open up the line for Q&A.
